This is an excerpt from Thursday’s (6/3) Point of Sale retail supply chain newsletter sponsored by ArcBest.

Plants are the new pets and pets are the new kids. This is the sentiment I hear often in my friend group and on social media. Younger generations are waiting longer to have children and are having fewer of them. Younger people, like myself, are giving our excess care to pets and when the pandemic locked us inside, pet adoption skyrocketed. This trend has been a boon for pet and wellness companies, both digitally native and traditional brick-and-mortar players. 

The intense battle between pet companies for market share and pet parents’ trust was well underway prior to the pandemic, but all these new furry friends have intensified it. On Petco’s Q1 earnings call, Chairman and CEO Ron Coughlin spoke directly about what he believes is his company’s competitive advantage over Chewy, Amazon and other online peers.  

“Our structural advantage of 1,453 microdistribution points through our Pet Care Centers is a strategic differentiator versus pure-play online competitors,” Coughlin said. “We can get to the customer faster for lower cost than shipping from a DC.”

Petco has been able to leverage its stores to fulfill 83% of online sales through ship-from-store, same-day delivery and BOPIS. That’s higher than the two-thirds of online orders fulfilled from stores by Target, which has the best omnichannel operation in retail. Petco has been driving traffic to curbside fulfillment with discounts as high as 25% for orders over $50 when customers pick up in-store. The company is also attempting to normalize same-day delivery from stores. “We’re actively shifting customer expectations to same-day delivery, something pure-play online competitors will be challenged to replicate nationally,” added Coughlin.

Petco’s large base of local stores offers an advantage of faster and lower-cost delivery over pure-play online pet stores, but I question whether consumers need faster delivery when buying from Petco or any other pet retailer. From a cost perspective, Target has proven the incredible cost savings of leveraging store locations as microfulfillment centers. Target executives have said shipping from stores, rather than from DCs, saves the company 40% on shipping costs. 

For Petco, the savings can be much higher for certain products, including fresh pet food, which are “much more costly” to ship from distribution centers, according to Coughlin.

“Giving a personal example, when my order of Just Food for Dogs, fish and sweet potatoes comes from one of our Pet Care Centers two miles from my house, it comes in a simple bag versus a pack box with cardboard with dry ice with foam packaging that online pure-play competitors use for comparable products,” Coughlin said. “Clearly, we have an advantage here.”

Petco’s stores are an advantage inasmuch as they do allow it to fulfill more cost effectively, especially for fresh food products, for which demand is growing rapidly. The stores can probably give it a speed advantage over Chewy (for the time being), although not necessarily over Amazon, which now has same-day delivery in many markets and is adding more by the week. 

But does the customer always need speed? Pet food makes up the majority of sales for all pet retailers, and food is bought regularly. Many parents, myself included, have subscriptions to such products so deliveries are scheduled at regular intervals. 

The option to buy online and pick up in store does give customers flexibility. Prior to giving into a subscription service, I was constantly buying food the day we ran out. In those instances, BOPIS is an appealing option for last-minute shoppers seeking in-store products, but Walmart, Target, Tractor Supply and everywhere else I’ve purchased pet food in the past also offers BOPIS. 

So what is Petco’s advantage? For retailers that are agile and able to invest, stores can be an asset for sure, but there are execution risks abound. Retrofitting stores to also act as microfulfillment centers can be complex and expensive. Then you must commit to holding the right inventory, which needs a transformative shift toward data-driven insights and continuous forecasting, which takes real investment. When decentralizing distribution, nodes and end points are dispersed throughout the supply chain. These are complex changes that must be implemented collaboratively with transportation partners. Lastly, decentralizing distribution means more inventory in the most expensive places to carry it, so inventory carrying costs will rise. 

So stores can certainly be an asset, but it’s less clear that Petco can utilize that asset effectively, to the extent that it becomes a growing competitive advantage against Amazon and Chewy. That is, at least from a product sales perspective. 

What gives Petco an edge over Chewy and Amazon is not speed of order fulfillment but all the other services it can offer at its stores. Last fall, Chewy opened its first automated, high-velocity fulfillment centers to speed up delivery times. And we all know what Amazon has been building and will continue to build until it has reached same-day delivery for most Americans. 

Chewy and Amazon may be able to get products to you in the same time frame as Petco (or even faster soon), but they can’t groom your pet, train your dog or offer in-person veterinary services. When it comes to all the in-person things people need and want for their pets, Petco does have an advantage it can build on. In October of last year, the company rebranded from Petco Animal Supplies to Petco, The Health + Wellness Co., doubling down on its yearslong bet that pet health care would be its key to staving off the meteoric growth of Chewy and the constant pressure from Amazon, Walmart, PetSmart and other legacy competition. 

All that being said, Petco still needs to offer fast delivery times if it wants to keep up. Options are the name of the game and stores, if invested in correctly, can give retailers a lot of viable options for consumers. 

If you enjoyed this piece, try Point of Sale, my twice weekly newsletter about the rapidly evolving retail supply chain. Join more than 2,500 supply chain nerds like myself for trends, news, and analysis of every corner of the retail supply chain. Sign up for free here:

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